Industrial sales of $14.5 million were up 22% from a year ago. The increase is primarily revenues from the TCP and Techtron acquisitions. Incoming orders remain strong. However, we know that two of our slip ring customers, in the closed-circuit TV business, have over-ordered in the first two quarters as they began new projects, so future sales may be somewhat lower.

I've said in the past that forecasting in the Components Group is more art than science. There are relatively few large, long-running orders so we try to begin the year with a relatively conservative forecast and adjust it as the year goes on. Our guidance ninety days ago was that we'd finish this year at $326 million. We're inching that forecast up to $330 million, driven primarily by the continued growth in the marine market. The aircraft and space business are also up slightly, but we're moderating our forecast in both medical and industrial.

Components Margins

Margins in the quarter of 17.3% were up nicely from last year's 14.2%. We're currently running ahead of our margin prediction for the year. We know that margins in this business are very much affected by product mix, and so we're projecting, hopefully conservatively, a moderation in the last two quarters and a year-end average of 16.8%.

Medical Devices Q2'08

The performance of our fledgling Medical Devices Segment in the first quarter of '08 was very close to our plan and left us optimistic about the rest of the year. Sales in that quarter were just over $27 million and operating profit was just over 13%. We were projecting subsequent quarters averaging $24.8 million in sales and $3.5 million in operating profit or about 14%. The results in the second quarter didn't come close to that forecast. Sales in the quarter were a disappointing $22.7 million and operating profit was $350,000 or just 1.5%.

Here's what happened. Pump sales at $8.2 million were $1.8 million off plan, but sales of the more-profitable intravenous pumps were $3.6 million off plan. B. Braun, our sales agency, had very strong hospital sales in quarter one which didn't repeat this quarter. We theorize that some hospital administrators had held on to their pump budget and then released it at the end of the calendar year. In addition, some key part shortages held up shipments to Europe. Sales of disposable pain pumps suffered as we're in the process of changing distributor organizations. Sales of administration sets at $7.8 million were $.5 million off plan, but once again the shortfall was in administration sets for IV pumps which are more profitable. During the quarter, we introduced a new offshore supplier and we got hung up with the B. Braun approval of this new source. So, although the overall sales miss was only $2.1 million, the dramatic product mix shift resulted in a $2.3 million shortfall in gross profit. That accounts for most of the problem. The other part is in higher SG&A expenses. It turns out that the ZEVEX organization has a sales commission plan, such that if certain sales goals are met, that triggers higher payouts. The very high ZEVEX product sales in our first half actually hit this trigger and the result was an unusual payment. In addition, we had some unanticipated legal fees and we invested more in R&D than planned. The result was increased expense of about $800,000 and the very modest operating profit.

So, where does that leave us for the year? We had targeted for the year, sales of $102 million and operating profit of 14% or $14.2 million. Based on our analysis of the first half performance, we now believe that a reasonable sales forecast for each of the next two quarters is about $24 million. It appears that sales of IV pumps will recover in the second half. In addition, sales of IV administration sets have resumed with the approval of the new supplier. So, it seems reasonable to believe that the normal run rate in the business will not be the $22.7 million of the second quarter, but more like $24 million per quarter. In addition, commission payments will moderate so we believe that operating profit of $2 million a quarter or about 8% should be achievable. This would result in a year-end sales level of $97.9 million, and operating profit of $8 million or about 8.2%.

I'm sure that many of you remember that we began our initiative into the medical market hoping to develop a product line with the potential for double-digit sales growth and 20% operating margins. Given our acquisition pattern, we're certainly achieving the sales growth. Thus far, we've not achieved 20% margins, but we do believe that that potential really does exist. We think that this year will be a year of rearranging and in some cases restaffing our organization, investing in the improvement of some of our production planning and quality assurance systems, and learning to work with channels of distribution in what is a new market for us. But we continue to believe that our initial assessment was correct. There is the potential in this business for high growth and very strong margin performance.

Summary of '08 Guidance

So, now let me summarize where we think we are for the fiscal year. The bottom line is that although we're revising our segment sales forecasts, mostly upward, and margin forecasts --some up, some down, the bottom line comes out about the same. We're now projecting sales in a range centered around $1.846 billion and a net earnings midpoint of $117.3 million or $2.71 a share which, I hasten to point out, is a 16% increase from last year. Looking at the individual segments, we've increased Aircraft sales to $657 million and changed our margin projection from 10% to 9.9%. In Space and Defense, we've increased the sales forecast to $246 million and changed margins from 12% to 11.2%. In Industrial Systems, we're increasing our sales projection to $516 million and increasing margins from 13.7% to 14.3%. In Components we're increasing sales to $330 million and margins to 16.8%. And, in Medical Devices, sales are now forecast at $97.9 million with margins of 8.2%. We are anticipating $.69 Earnings per Share in the third quarter and $.72 Earnings per Share in the fourth quarter.